Walmart head merchant shares view

November 2, 2011

BENTONVILLE, Ark. — Walmart chief merchandising officer Duncan Mac Naughton expressed optimism about the retailer’s prospects for the holiday season and beyond late Tuesday during comments at a Bentonville Bella Vista Chamber of Commerce function, which attracted more than 500 people.

Those in attendance were predominantly Walmart suppliers eager to gain the latest insights from the company’s top merchant regarding a strategy he referred to as “refreshingly simple,” which is producing results. Mac Naughton prefaced his remarks on a wide range of topics by noting that the company is two weeks away from the release of third-quarter results on Nov. 15, and he would need to be careful about what he said. Some of his comments were a recap of previously disclosed financial details about how the company produced positive same-store sales the last month of the second quarter and the first two months of the third quarter and is continuing to gather momentum going into Christmas.

He also laid out the reasons for that momentum and how it is the result of a renewed commitment to offer everyday low prices on the broadest assortment of merchandise while maintaining tight expense control so the savings can be reinvested in price to deliver on the company’s value proposition of saving people money so they can live better.

“We are quite focused on rededicating ourselves to these three pillars of our business model,” Mac Naughton said.

A key driver during the past year was Walmart’s decision to add back roughly 10,000 items to its product assortment. The addition of items, especially in categories shopped by core customers, such as sporting goods and automotive, has helped the company regain traffic and is yielding results in categories that had previously be de-emphasized. Same-store sales in the hunting category are up 16% and the tire category is up 7% thanks to expanded assortments and the addition of brands, according to Mac Naughton. He also noted the company is interested in winning in categories even though they may be in decline, highlighting a sharp reversal in thinking with his predecessor John Fleming. As an example, Mac Naughton pointed to dump bins filled with $5 DVDs and CDs located in Walmart aisles that generate $300 million in annual sales. “Our core customers are doing head dives into these bins,” Mac Naughton said.

In addition, the emphasis on expense control is expected to enable the company to reduce prices by $2 billion in the next two years, and Mac Naughton said those cuts would come across the board as opposed to the type of “atomic rollbacks” undertaken 18 months earlier when prices were slashed on a handful of select items, and he said Walmart violated trust with shoppers.

Mac Naughton made sure to remind suppliers that the future price investments would come primarily from productivity improvements and increased efficiency. Walmart has lowered its new store construction and remodel costs, is focused on improving store productivity and leveraging its distribution network to ship more cases even though trucks travel fewer miles.

The other key factor in sales improvements to date and the anticipation of more gains going forward is increased on shelf availability of product. Walmart earlier this year introduced the metric of OSA (on-shelf availability) to its lexicon. Previously, the company had deluded itself to believing it was in stock if perpetual inventory systems showed merchandise was in the store. It may have been, but if it wasn’t on the shelf and available for sale from the shoppers perspective it was out of stock. Thanks to an emphasis in this areas and physical audits every week by third parties, Mac Naughton said between March and September Walmart has moved the OSA needle 570 basis points to where it is now above 93%.

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